In October AGL Resources will become the first gas utility inthe U.S. to completely exit the gas merchant function, but itstransformation is far from over, AGL CEO Walter Higgins saidyesterday. Higgins expects his company to be snatched up like thefirst pie out of the oven, probably by some hungry electric firmeager to get its hands on a utility that has emerged fromderegulation relatively well done.

“I’d be very surprised if we’re not consolidated somehow,”Higgins told NGI, following a speech at the Natural Gas Roundtablein Washington, D.C. “There are so many different people that callme all the time about [merging]: foreign companies, electrics,other gas companies. Everybody sees what’s going on, and nobody ismissing the point that you need to get bigger if you want to becompetitive.

“I’d say we won’t look like we do in two years. That doesn’tmean we’re going to announce a merger tomorrow,” he said. “But Iwouldn’t be surprised if we’re not in some sort of alliance,whether strategic or not, or some sort of a merger, or somebodyjust plain acquires us within the next couple years.”

AGL is by far the largest gas company in the Southeast, with 1.5million customers. The next largest gas company in the region isPiedmont Natural, with about 650,000 customers. But gas companiesare small compared to electrics, Higgins noted. “There’s no way wecould ever buy — unless we suddenly declared ourselves AGL.com andcreated some phantom revenues and got a 100-to-1 P/E ratio. Anyelectric company that you can imagine, even the smallest of themlike Scana or Tampa Electric, are huge by comparison to us.”

In the meantime, AGL intends to focus on completing thetransition to a pure gas distribution utility with a nonregulatedretail energy marketing arm that will compete initially only in theSoutheast.

First and foremost is completing the transition to adistribution-only utility, which will be accomplished when all 1.5million of its gas customers switch or are assigned to marketers byOctober. So far, 850,000 customers have switched to buying gasfrom the 20 marketers operating in the state.

“The pace of customer migration has been so rapid, much fasterthan anyone planned during the unbundling hearings and therate-setting process, that we’re actually [not keeping pace],”Higgins said. Although he didn’t provide any figures, he said thetransformation is costing AGL a bundle because the regulatorymechanisms set up to reduce AGL’s revenue as merchant customersdepart is “not in sync with the reality of the market. We’ll filewith the commission for some way of mitigating that problem becauseright now we’re sustaining costs that are not covered in our ratesand that’s not right,” he said.

AGL also is negotiating with Sonat to get out of their wholesaleenergy marketing joint venture, Sonat Marketing. The venture haslost AGL money in the first two quarters of its 1998-99 fiscal yearand will have a negative impact on total earnings for the year.

“We’re certainly behind the eight ball in Sonat Marketingbecause we lost money, as was reported in the first and the secondquarter. On the other hand, the Street has us earning in the$1.30/share range this year and that’s probably possible.”

AGL hopes to grow in retail marketing through SouthStar EnergyServices LLC, a joint venture with Dynegy and Piedmont Natural Gas.SouthStar, which sells gas in Georgia under the name GeorgiaNatural Gas, began marketing in the state during the first quarterof this year and currently holds a 35% market share. Higgins saidthe company plans to target Virginia next and possibly other statesin the region. He said SouthStar probably will attempt to formalliances with other local or regional retail marketing operationsin an effort to become the regional marketing powerhouse.

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